Introduction

Islamic Banking Theory and Practice

Course
 1. Characteristics of Islamic Financial
System
1. Allah is the Sustainer
2. God is Real Owner of Everything and Man is Merely a
Trustee
3. Everything Created for Service and Use of Man
4. Concept of Halal and Haram
5. System of Sadaqat and Zakat
6. Prohibition of Interest
7. Ban on Hoarding of Wealth
8. Policy of Moderation
9. Condemnation of Monasticism and Materialism
10. Equity and not Equality
 2. Principles of Islamic Financial
System
Basic idea of Islamic Financial System is
prohibition of receipt and payment of interest.
Literature based on the divine guidance about
Islamic financial system suggest the following
principles.
1. Money as potential capital
2. Prohibition of Interest
3. Risk Sharing
4. Sanctity of Contracts
 2. Principles of Islamic Financial System

5. Sharia Approved Activities

6. Individual Liberty
7. Right to Own Property
8. Economic Inequality and Charity
9. Social Equality
10. Circulation of Wealth
 3. The existing economic system
Some of the known economic systems are;
•Capitalism
•Socialism
•Communism
•Islamic economic system
 4. Comparison of the Economic
Systems
1. characteristics of Socialism and communism, such as
their definition, ideas, economic system, social
structure, freedom of choice, ownership of private
property, and means of control etc.
2. A comparison of the major economic systems in the
world, i.e. Capitalism, Socialism, Communism, and
Islamic economic system.
 5. Money in Islamic Financial System

• Concept of money, how it evolved from

representative money to fiat money.
• Role of money in the economy and its usage
as a tool to create debt.
• You will also watch an animated documentary
explaining the role of money as debt.
 5. Money in Islamic Financial System

Implication of Fiat Money

•Credit Creation

•Inflation

•Unjust wealth appropriation

•Deposit multiplication
 6. Factors of Production in
Islamic Economic System
• Conventional concept of factors of production,
i.e. land, labor, capital, and entrepreneur.
• Concept of factors of production in Islamic
economic system.
• Role of money as of being a factor of production.
 6. Factors of Production in
Islamic Framework
All productive inputs are grouped into two categories;
1.Factor inputs: those inputs that don’t get consumed
in the production process.
2.Consumed inputs: those inputs that are consumed
during the production process and lose their original
nature and shape, e.g. fuel, raw cotton, plastic, etc.
 6. Factors of Production in
Islamic Framework
Money as factor of production:
•Money is recognized as “consumed input” and
become useful only when converted into consumed
input or factor input.

•Money itself is not considered a factor of production

but it has the potential to become a factor of
production.
 7. Money: An Islamic Viewpoint
The Concept and Nature of Money in Conventional system :

1.Money is a commodity and is used to obtain other goods.

2.Widely Marketable as it is highly in demand and valued good.

Thus, it is sure that it can be used anytime and anywhere.

3.It can be transport easily. Money is made to make human life

easier therefore to make sure that convenience is important.

4.Relatively scarce as it is high in demand and high in value,

which means it holds a high value in small quantities
 7. Money: An Islamic Viewpoint
Nature of money under Conventional system

5.Money is relatively imperishable. It is durable and can be used

for future purchases.

6.Easy to store.

7.Easily divisible

8.Money lasts forever.

9.All units of money are similar, means that it is easy to

distinguish and estimate the value of the money.
 7. Money: An Islamic Viewpoint
Nature of money under Islamic system
1.Islam treats money as unit of account to determine the
relative worth of goods and services.
2.A medium of exchange, and not a store of value.
3.All units of money of the same denomination are 100% equal
to each other.
4.It becomes useful only when it is exchanged into a real asset or
used to buy services.
5.Money cannot be sold or bought on credit.
 8. Principles of Islamic Banking

• Governing features of Islamic banking system

1. The prohibition of interest based transactions

2. Avoidance of speculations (gharar)

3. Avoidance of oppression (zulm)

4. Introduction of Islamic tax (zakat)

5. Financing of Sharia Approved activities

• Comparison of Islamic and conventional banking system.
 9. Islamic Modes of Financing:
Murabaha
After this lecture you should be able to understand
•The concept of Murabaha

•The stages involved in Murabaha transaction

•Practical issues in Murabaha and their resolution

•Murabaha documentation

•Uses of Murabaha as Mode of finance (Local as well as import

Murabaha)
 10. Islamic Modes of Financing:
Salam and Istisna

1. Salam and parallel Salam

2. Istisna and parallel Istisna

3. And the differences between the Salam and Istisna

modes of financing
 11. Islamic Modes of Financing:
Musharakah
Musharakah is a form of partnership which is based on profit
and loss sharing.
•Types of Shirkah

a.Shirkah al-Aqad (commercial partnership)

b.Shirkah al-Milk (joint-ownership).

Shirkat al-Aqad refers to partnership with commercial objective,

whereas, Shirkah al-Milk refers to joint-ownership in a particular
asset.
 12. Islamic Modes of Financing:
Mudarabah
• This is a kind of partnership between the two parties where
one partner contributes capital and the other one contributes
efforts as manager or entrepreneur. The profit of the venture
is share at an agreed ratio while the losses are borne by the
capital provider.

• The investment comes from “Rabb-ul-Maal” (Investor) while

the management and work is an exclusive responsibility of
the working partner, who is called Mudarib.
 13. Islamic Modes of Financing:
Diminishing Musharakah
• The concept of Diminishing Musharakah

• Features and rules of diminishing Musharakah.

• Uses of diminishing Musharakah particularly in House

Financing for four purposes:

1. Purchase of House

2. Construction of House

3. Renovation of House

4. Balance Transfer Facility (BTF)

 14. Islamic Modes of Financing: Ijarah

Ijarah literally means to rent or lease something. In its technical

sense, the term Ijarah has two different connotations as follows:

I.A hire contract to employ the services of a person with wages

given to him/her as a consideration for his/her hired services.

II.A lease contract to transfer the usufruct of a particular property

to another person in exchange for a rent from the client.

 15. Applications of Islamic Financing

The concept of Islamic financing regarding its applications

in different areas like. Musharakah, Mudarabah, and
Murabaha is applied in;
1.Project financing
2.Working capital financing
3.Import financing
4.Export financing
 16. Islamic Investment Funds
• Principles of Islamic investment funds.
• Modes of investment of funds and their
management under Islamic financial system.
1. Equity fund
2. Ijarah funds
3. Commodity funds
4. Murabaha funds
5. Bai al Dain
6. Mixed funds
 17. Sukuk
• Sukuk is the Arabic name for a financial certificate.

• Its an Islamic alternative to the conventional interest

bearing bonds.
• Sukuk is a Trust certificate in which investor returns are
derived from legal or beneficial ownership of assets.
• Comparison of Sukuk and Bond

• Controversies/objections in Sukuk
 18. Risk Underlying Islamic Financial
Modes
After this lecture you will be able to understand
•The basic concept of risk and its classification into
different types.
•Risks faced by the financial institutions.
•Uniqueness of risk in Islamic banks.
•Risks in Islamic Financial instruments.
•How to mitigate in Islamic financial instruments.
 19. Takaful (Islamic Insurance)
• Concept of conventional Insurance
• Objections against conventional Insurance
system
• Difference between Takaful and conventional
insurance
• Different models of Takaful like Wakalah
model, Mudarabah model, and the Hybrid
model (Wakalah and Mudarabah)
 20. Evolution of Islamic Banking in
Pakistan

• Social and political background of Pakistan

• History of Islamic banking in Pakistan

• Fact and figures regarding Islamic banking in

Pakistan
 Summary of the Lecture
In this lecture we had an introduction of the
course.